Prior ST9 Exams
C. Lau
September 27, 2016
2016 April
Question 1
Q1.i
Reasons to build an internal model for ERM
Module 30 Section “Internal Capital Models”
Module 21 Section “Model Development”
Q1.ii
Pros and cons of using standard formula vs internal model for SII
Module 30 Section “Internal vs Generic Models”
Key to focus is on the small size and niche risk of the company
Make sure to discuss both sides
Q1.iii
Selection of models between 3 options
Some key points:
Model 1:
Runtime okay
Less human error
Some approximation
Appropriate matching assets might be hard to find
Model 2:
Least approximation
Hard to calibrate (due to high number of real world scenarios needed)
Long run time
Too complex hard to test
Model 3:
- Greatest level of simplification
Q1.iv
Additional information on the software to request
- A bunch of stuff easy
Question 2
Q2.i
Propose practical cost effective ERM activities
Make sure we’re not just proposing mitigation activities
Key is on the early steps of the ERM process and more focus on the governance
Identify
Risk register
Risk appetite and tolerance statement
RMC and have meetings and risk reports
Appoint risk manager
Module 13 Section “Risk Identification and Assessment Process”
Module 9 Section “Risk Management Policy”
- Risk appetite, risk tolerance, risk limits
Module 10 Section “Risk Reporting”
- Not as much from here, mostly just report
Q2.ii
How bank would evaluate the credit risk of the company
Should be mostly from Module 23 and 28
- Module 28 Section:
Credit Granting,Underwriting,Due Diligence
- Module 28 Section:
List out the assumptions, how to access probability of default and loss given default
Key is to have a wide range of ideas
PD
Assess this for key possible reasons for default
1 reason would be due to non payment
Another reason could be macro driven (e.g. property value < loan principal)
LGD
- Walk through what the LGD would be
Q2.iii
Improvement on corporate governance
Module 4, 11, 12 (maybe 8 and 9)
Some key themes
BoD structure
- NEDs and its benefits
Incentivise the BoD
Expand shareholders
Board committees
Audit structure
Q2.iv
Risk identification tools
Module 3
- Section “Risk Identification Tools”
Q2.v
10 potential op risk
- List a bunch of op risk…
Q2.vi
Whether holding additiona capital is a suitable risk mitigation technique for op-risk
- Modeul 29 (maybe 24)
Q2.vii
Alternative mitigation techniques for the op-risk in v
- Modeul 29 (maybe 24)
Q2.viii
Modeling for flood risk
- EVT
Q2.ix
Information needed for modeling flood risk
Module 20, 15
Amount of data, for freq and sev
Repair cost and expert judgement (for trends and changes)
Q2.x
Overall corporate risk exposure and importance of each risk after allowing for the impact of likely mitigation strategies
Module 13
Use Categorization technique to rank the risk
State what are the objectives used to judge the risk
Define what high risk is
Categories of risk:
- Operational
list out the rating for freq and sev and any mitigations
Financial
Customer demand
Other
Other considerations
Correlations
Company’s mitigation process
Conclusions
Question 3
Q3.i
Ways to reduce financial market risk exposure without risk transfer
Module 26, 27, 28
Avoidance
Diversification
ALM
Internal control
Q3.ii
ALM risk
- Module 22, 27
Q3.iii
Cashflow matching
- Module 22, 27
2015 April
2015 Exam and Examiners’ Report
Question 1
Q1.i
Assess the fitted t distribution
Module 15, 16, 19
Discuss data set size, applicability for future (regime shift)
Shapes of the empirical
Fitted vs empirical
Data excludes dividend income
Q1.ii
Propose further analysis or adjustments
Remove dependencies and overlap
Longer period of data
Q1.iii
Assess the stress scenario picked
See how it stacks with a normal distribution with the observed s.d.
diversification (not bad at the same time)
Comprae the series
Q1.iv
Discuss features on spread and how it should behave
Q1.v
Suggest possible extensions to the analysis
Other consideration that impact the spread
Split by industry, include other countries
Q1.vi
Model future risk free bond yields using PCA
Module 22 and 16 (Maybe 19)
Straight from the notes
Module 22 talks about how to fit the data
Modeul 16 talks about how to simulate with PCA
Q1.vii
How many PC are likely to be used
- 3: parallel shift, slope, yield curve to bend
Q1.viii
Currency movement impact on solvency ratio and how to hedge
Explain why it would impact the ratio
Propose how to hedge with forward
Q1.ix
Disadvantage of the above viii
- Ignores dependencies between risks
Q1.x
Propose alternative objectives for the currency risk hedging
Intead of a fix 200%
Introduce probabilitys
Q1.xi
Why hold captial for currency risk
- Not accounting for interdependences, regulatory requirement, counterparty risk, other assets
Q1.xii
How ERM will help with sovereign deft crisis before, during and after the crisis
List out ERM benefits first
On risk identification, quantification, limits
Crisis plan
Before crisis
- Plan and prepare
During
Reporting, operational effectiveness
Profit off the crisis, minimize impact
After
- Lessons learned, market confidence, contagion
Q1.xiii
Buying CBI insurance, risk that could arise during sovereign debt crisis (and how hard it is to quantify)
- lapse risk, new business volume, op-risk
Question 2
Q2.i
Evaluate the risk culture
Q2.ii
Identify and analyse emerging risk
horizon scanning
holistic view
Q2.iii
Implications on diminishing natural resources
- On asset, liabilities and deficit
Q2.iv
Actions to take on the above
- Invest in energy and commodity
Question 3
Q3.i
How to hedge the guarantee using HPI floors
Q3.ii
Describe the weakness of the hedge
Basis risk (actual outperforming or underperformaing the HPI)
High cost
Liquidity, credit risks
Q3.iii
Using RPI instead of HPI
Assess the basis risk
Should remove trend before accessing correlation
Time period chosen
Difference in the cumulative increase
Q3.iv
Additional analysis
